Without the gold standard, the industrial-consumer revolution would
never have taken off with the speed that it did in the 19th century.
We'd still be watching lantern-shows, not TV, or riding in
horse-drawn omnibuses, not cars. Big international trade could never
have developed as rapidly as it did without the frequent transfer of
gold bullion back and forth between international banks in order to
balance-up what otherwise would have been purely barter exchanges
between one country and another. Big international loans were made
using gold bullion or coins, not banknotes. Interest payments of
those loans and capital repayments were also made in gold. Big banks
saved up gold as their reserves, not the banknotes of their own
countries, just in case their populations lose faith in their paper
documents (which has happened hundreds of times already in this
country or that).
The reason for all this was that no country could accurately evaluate
the value of the banknote currency of another country. Banknotes of
various sorts were useful representations of value but only within
their country of origin. Gold (or silver to a lesser extent) was the
only currency that was universally recognized as being valuable.
Furthermore, because the total quantity of gold hardly changed from
year to year, it had attained a value (per unit of weight) that was
almost identical (relative to basic commodities) throughout the world
wherever goods were being imported or exported.
Because gold is a rare metal, it didn't matter very much at the
beginning of the industrial-consumer revolution how much gold there
was in the world. As it diffused between countries as a trading
currency, it took on a particular value as the whole world sensed its
rarity. Also, because the total weight of world gold is increased
from mining by only about 1% a year, its value changes only slightly
from year to year. This is why such high reliance could be placed on
it when prices were quoted in merchants' catalogues anywhere in the world.
The above simple facts elude many economists including, I was
astonished to learn yesterday, the most influential economist in the
world. He is Ben Bernanke, the Chairman of the US Federal Reserve
(America's central bank) who decides how many US dollars to print. In
reply to a question from a US Congressman he said the dollar (or
implicitly any other currency) can't go back onto a gold standard
because there isn't enough of it! The fact is, as explained above,
its total world quantity doesn't really matter so long as it remains
relatively rare and remains in stable quantities from year to year!
If a wicked galactic alchemist could transmute half the world's gold
into lead, then the remaining gold would be instantly worth twice as
much per ounce or gram. If an asteroid visited us with 160,000 tonnes
of gold aboard then the price of gold would exactly halve.
If neither event occurs -- or, conceivably, even if one did! -- then
the central banks of the world -- after an initial shudder no doubt!
-- would continue what they have been doing increasingly for the last
ten years or so as the US dollar becomes shakier. Germany, France and
Italy would hang onto the large quantities they already have in their
vaults. China and Russia, the largest gold miners in the world, would
continue to buy gold on the open market, not sell it. Increasing
numbers of emergent countries are now buying gold for their reserves.
Millions of individuals around the world are buying gold coins as a
hedge against what their pensions might be reduced to. Everybody is
becoming deeply nervous about the future of the US dollar and the
Eurozone euro.
The person who knows more than most about the matter, and is more
objective than Bernanke is Robert Zoellick, the now-retiring
President of the World Bank. He said in late 2010: "Although text
books may view gold as the old money, markets are using gold as an
alternative monetary asset today." We are actually moving towards
the re-establishment of the gold standard.
Keith
Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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